Deutsche Bank's 2018 bonuses were always wishful thinking

It's happened. If you work for Deutsche Bank and you believed all the stuff from Christian Sewing and James Von Moltke about this year's bonuses being as generous as last, you have been revealed as the sort of incorrigible optimist who thinks a No Deal Brexit would be a blip on the road to nirvana.

The Financial Times today quotes some unnamed investment bankers at Deutsche who say bonuses for 2018 will in fact be "significantly down" on last year, with some areas seeing drops of between 15% and 20%.

If you've been paying attention, this should come as no surprise. Irrespective of performance in the fourth quarter, Deutsche Bank was always going to have problems paying bonuses for 2018. The charts below explain why.

CEO Sewing and CFO Von Moltke have been hamstrung by their unwavering commitment to keep costs across the whole of Deutsche Bank below €23bn for 2018.

As the first chart below shows, expenditure at Deutsche actually increased in the first nine months of 2018 - to €17.8bn from €17.7bn one year earlier. This unfortunately meant that if Deutsche Bank wants to meet its full year cost target of €23bn, it could only spend €5.2bn in the final quarter. But.....in the final quarter of 2017, Deutsche spent nearly €7bn.

In the final three months of 2018, Sewing and Von Moltke therefore needed to cut costs by 25% compared to the final quarter of the previous year.

If you work in the corporate and investment bank (CIB), this should always have filled you with dread. This is because - as the second chart below highlights - the fourth quarter is key for accruing bonuses at DB.

In 2017, Deutsche ramped up compensation spending in the CIB by nearly 40% year-on-year (to €1.3bn) in the final quarter after it decided to normalize the bonus pool and compensate for its decision to not to pay performance bonuses for 2016. With almost no bonuses paid in 2016 and comparatively generous bonuses paid in 2017, it's safe to assume that most of the extra €366m spent on compensation in the corporate and investment bank in the Q4 2017 went to the bonus pool.

In 2018, however, Sewing and Von Moltke found themselves having to cut costs across DB by 25% in the final quarter, and the investment bank's bonus pool was always going to be the prime target. Anyone who thought Deutsche's senior executives were going to repeat 2017's generosity was ignoring reality.

There is some good news. Sewing and Von Moltke have suggested that bonuses were booked earlier at Deutsche Bank last year (although there was little sign of this in compensation spending for the investment bank in the first three quarters - see the chart below). Front office headcount at Deutsche was also down 5% at the end of September 2018 versus the end of September 2017, so there are fewer people with a claim on the pot.

However, overall CIB headcount (for back offfice and front office staff) was barely down in the first nine months of 2018. Even so, we'd suggest that Sewing and Von Moltke will be looking to cut spending on pay at the corporate and investment bank by at least 5% to €4.1bn for last year. This would also imply considerably lower compensation spending in the fourth quarter. For a lot of Deutsche Bank staff, therefore, 2018's bonus payments could be horribly reminiscent of 2016's. Sorry to break the news.

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